1 Introduction to Financial Statements 1-1
Knowing the Numbers: Columbia Sportswear Company 1-1
1.1 Business Organization and Accounting Information Uses 1-2
Forms of Business Organization 1-3
Users and Uses of Financial Information 1-4
Data Analytics 1-6
Ethics in Financial Reporting 1-7
1.2 The Three Types of Business Activity 1-8
Financing Activities 1-9
Investing Activities 1-9
Operating Activities 1-10
1.3 The Four Financial Statements 1-11
Income Statement 1-12
Retained Earnings Statement 1-13
Balance Sheet 1-14
Statement of Cash Flows 1-16
Interrelationships of Statements 1-17
Elements of an Annual Report 1-20
Appendix 1A: Career Opportunities in Accounting 1-23
“Show Me the Money” 1-24
2 A Further Look at Financial Statements 2-1
Just Fooling Around?: The Motley Fool 2-2
2.1 The Classified Balance Sheet 2-3
Current Assets 2-3
Long-Term Investments 2-5
Property, Plant, and Equipment 2-5
Intangible Assets 2-5
Current Liabilities 2-7
Long-Term Liabilities 2-7
Stockholders’ Equity 2-7
2.2 Analyzing the Financial Statements Using Ratios 2-8
Ratio Analysis 2-8
Using the Income Statement 2-9
Using a Classified Balance Sheet 2-10
2.3 Financial Reporting Concepts 2-14
The Standard-Setting Environment 2-14
Qualities of Useful Information 2-16
Assumptions in Financial Reporting 2-17
Principles in Financial Reporting 2-18
Cost Constraint 2-18
3 The Accounting Information System 3-1
Accidents Happen: MF Global Holdings Ltd 3-1
3.1 Using the Accounting Equation to Analyze Transactions 3-3
Accounting Transactions 3-3
Analyzing Transactions 3-4
Summary of Transactions 3-10
3.2 Accounts, Debits, and Credits 3-11
Debits and Credits 3-11
Debit and Credit Procedures 3-12
Stockholders’ Equity Relationships 3-15
Summary of Debit/Credit Rules 3-16
3.3 Using a Journal 3-17
The Recording Process 3-17
The Journal 3-18
3.4 The Ledger and Posting 3-20
The Ledger 3-20
Chart of Accounts 3-21
Posting 3-21
The Recording Process Illustrated 3-22
Summary Illustration of Journalizing and Posting 3-28
3.5 The Trial Balance 3-30
Limitations of a Trial Balance 3-31
4 Accrual Accounting Concepts 4-1
Keeping Track of Groupons: Groupon 4-1
4.1 Accrual-Basis Accounting and Adjusting Entries 4-2
The Revenue Recognition Principle 4-3
The Expense Recognition Principle 4-4
Accrual versus Cash Basis of Accounting 4-5
The Need for Adjusting Entries 4-5
Types of Adjusting Entries 4-6
4.2 Adjusting Entries for Deferrals 4-7
Prepaid Expenses 4-7
Unearned Revenues 4-12
4.3 Adjusting Entries for Accruals 4-15
Accrued Revenues 4-15
Accrued Expenses 4-17
Summary of Basic Relationships 4-20
4.4 The Adjusted Trial Balance and Closing Entries 4-23
Preparing the Adjusted Trial Balance 4-23
Preparing Financial Statements 4-24
Quality of Earnings 4-24
Closing the Books 4-27
Summary of the Accounting Cycle 4-30
Appendix 4A: Using a Worksheet 4-34
5 Merchandising Operations and the Multiple-Step Income Statement 5-1
Buy Now, Vote Later: REI 5-1
5.1 Merchandising Operations and Inventory Systems 5-2
Operating Cycles 5-3
Flow of Costs 5-4
5.2 Recording Purchases Under a Perpetual System 5-6
Freight Costs 5-8
Purchase Returns and Allowances 5-9
Purchase Discounts 5-10
Summary of Purchasing Transactions 5-11
5.3 Recording Sales Under a Perpetual System 5-11
Sales Returns and Allowances 5-13
Sales Discounts 5-14
Data Analytics and Credit Sales 5-15
5.4 Preparing the Multiple-Step Income Statement 5-16
Single-Step Income Statement 5-16
Multiple-Step Income Statement 5-17
5.5 Cost of Goods Sold Under a Periodic System 5-21
5.6 Gross Profit Rate and Profit Margin 5-23
Gross Profit Rate 5-23
Profit Margin 5-24
Appendix 5A: Periodic Inventory System 5-27
Recording Merchandise Transactions 5-27
Recording Purchases of Merchandise 5-28
Freight Costs 5-28
Recording Sales of Merchandise 5-28
Comparison of Entries—Perpetual vs. Periodic 5-29
Appendix 5B: Adjusting Entries for Credit Sales with Returns and Allowances 5-30
Data Analytics in Action 5-52
6 Reporting and Analyzing Inventory 6-1
“Where Is That Spare Bulldozer Blade?”: Caterpillar 6-1
6.1 Classifying and Determining Inventory 6-2
Classifying Inventory 6-2
Determining Inventory Quantities 6-4
6.2 Inventory Methods and Financial Effects 6-7
Specific Identification 6-7
Cost Flow Assumptions 6-8
Financial Statement and Tax Effects of Cost Flow Methods 6-13
Using Inventory Cost Flow Methods Consistently 6-15
6.3 Inventory Presentation and Analysis 6-17
Presentation 6-17
Lower-of-Cost-or-Net Realizable Value 6-17
Financial Analysis and Data Analytics 6-18
Adjustments for LIFO Reserve 6-21
Appendix 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 6-24
First-In, First-Out (FIFO) 6-24
Last-In, First-Out (LIFO) 6-25
Average-Cost 6-26
Appendix 6B: Effects of Inventory Errors 6-27
Income Statement Effects 6-27
Balance Sheet Effects 6-28
Data Analytics in Action 6-49
7 Fraud, Internal Control, and Cash 7-1
Minding the Money in Madison: Barriques 7-1
7.1 Fraud and Internal Control 7-3
Fraud 7-3
The Sarbanes-Oxley Act 7-3
Internal Control 7-4
Principles of Internal Control Activities 7-5
Data Analytics and Internal Controls 7-10
Limitations of Internal Control 7-11
7.2 Cash Controls 7-12
Cash Receipts Controls 7-12
Cash Disbursements Controls 7-14
Petty Cash Fund 7-16
7.3 Control Features of a Bank Account 7-17
Electronic Banking 7-18
Bank Statements 7-18
Reconciling the Bank Account 7-20
7.4 Reporting Cash 7-25
Cash Equivalents 7-26
Restricted Cash 7-26
Managing and Monitoring Cash 7-27
Cash Budgeting 7-29
Appendix 7A: Operation of a Petty Cash Fund 7-32
Establishing the Petty Cash Fund 7-33
Making Payments from the Petty Cash Fund 7-33
Replenishing the Petty Cash Fund 7-34
Data Analytics in Action 7-56
8 Reporting and Analyzing Receivables 8-1
What’s Cooking?: Nike 8-1
8.1 Recognition of Accounts Receivable 8-3
Types of Receivables 8-3
Recognizing Accounts Receivable 8-3
8.2 Valuation and Disposition of Accounts Receivable 8-5
Valuing Accounts Receivable 8-5
Disposing of Accounts Receivable 8-13
8.3 Notes Receivable 8-15
Determining the Maturity Date 8-16
Computing Interest 8-16
Recognizing Notes Receivable 8-17
Valuing Notes Receivable 8-17
Disposing of Notes Receivable 8-17
8.4 Receivables Presentation and Management 8-20
Financial Statement Presentation of Receivables 8-20
Managing Receivables 8-21
Evaluating Liquidity of Receivables 8-23
Accelerating Cash Receipts 8-24
Data Analytics and Receivables Management 8-25
Data Analytics in Action 8-46
9 Reporting and Analyzing Long-Lived Assets 9-1
A Tale of Two Airlines: American Airlines 9-1
9.1 Plant Asset Expenditures 9-3
Determining the Cost of Plant Assets 9-3
Expenditures During Useful Life 9-6
To Buy or Lease? 9-7
9.2 Depreciation Methods 9-8
Factors in Computing Depreciation 9-9
Depreciation Methods 9-9
Revising Periodic Depreciation 9-14
Impairments 9-15
9.3 Plant Asset Disposals 9-16
Sale of Plant Assets 9-16
Retirement of Plant Assets 9-18
9.4 Intangible Assets 9-19
Accounting for Intangible Assets 9-19
Types of Intangible Assets 9-20
Research and Development Costs 9-22
9.5 Statement Presentation and Analysis 9-23
Presentation 9-23
Analysis 9-25
Appendix 9A: Other Depreciation Methods 9-30
Declining-Balance Method 9-30
Units-of-Activity Method 9-31
Data Analytics in Action 9-55
10 Reporting and Analyzing Liabilities 10-1
And Then There Were Two: Maxwell Car Company 10-1
10.1 Accounting for Current Liabilities 10-3
What Is a Current Liability? 10-3
Notes Payable 10-3
Sales Taxes Payable 10-4
Unearned Revenues 10-5
Current Maturities of Long-Term Debt 10-6
Payroll and Payroll Taxes Payable 10-6
10.2 Characteristics of Bonds 10-9
Types of Bonds 10-9
Issuing Procedures 10-10
Bond Trading 10-10
Determining the Market Price of a Bond 10-11
10.3 Accounting for Bond Transactions 10-14
Issuing Bonds at Face Value 10-14
Discount or Premium on Bonds 10-14
Issuing Bonds at a Discount 10-15
Issuing Bonds at a Premium 10-17
Redeeming Bonds at Maturity 10-19
Redeeming Bonds Before Maturity 10-19
10.4 Presentation and Analysis 10-20
Presentation 10-20
Analysis 10-22
Appendix 10A: Straight-Line Amortization 10-26
Amortizing Bond Discount 10-26
Amortizing Bond Premium 10-28
Appendix 10B: Effective-Interest Amortization 10-29
Amortizing Bond Discount 10-29
Amortizing Bond Premium 10-31
Appendix 10C: Accounting for Long-Term Notes Payable 10-32
11 Reporting and Analyzing Stockholders’ Equity 11-1
Oh Well, I Guess I’ll Get Rich: Facebook 11-1
11.1 Corporate Form of Organization 11-3
Characteristics of a Corporation 11-3
Forming a Corporation 11-6
Stockholder Rights 11-7
Stock Issue Considerations 11-8
Corporate Capital 11-10
11.2 Accounting for Common, Preferred, and Treasury Stock 11-12
Accounting for Common Stock 11-12
Accounting for Preferred Stock 11-13
Accounting for Treasury Stock 11-14
11.3 Accounting for Dividends and Stock Splits 11-16
Cash Dividends 11-16
Dividend Preferences 11-19
Stock Dividends 11-21
Stock Splits 11-22
11.4 Presentation and Analysis 11-24
Retained Earnings 11-24
Retained Earnings Restrictions 11-25
Balance Sheet Presentation of Stockholders’ Equity 11-26
Analysis of Stockholders’ Equity 11-28
Debt versus Equity Decision 11-29
Appendix 11A: Entries for Stock Dividends 11-32
Data Analytics in Action 11-55
12 Statement of Cash Flows 12-1
Got Cash?: Microsoft 12-2
12.1 Usefulness and Format of the Statement of Cash Flows 12-3
Usefulness of the Statement of Cash Flows 12-3
Classification of Cash Flows 12-3
Significant Noncash Activities 12-4
Format of the Statement of Cash Flows 12-5
12.2 Preparing the Statement of Cash Flows— Indirect Method 12-6
Indirect and Direct Methods 12-7
Indirect Method—Computer Services Company 12-7
Step 1: Operating Activities 12-9
Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 12-12
Step 2: Investing and Financing Activities 12-13
Step 3: Net Change in Cash 12-15
12.3 Analyzing the Statement of Cash Flows 12-17
The Corporate Life Cycle 12-17
Free Cash Flow 12-19
Appendix 12A: Statement of Cash Flows—Direct Method 12-22
Step 1: Operating Activities 12-24
Step 2: Investing and Financing Activities 12-28
Step 3: Net Change in Cash 12-30
Appendix 12B: Worksheet for the Indirect Method 12-30
Preparing the Worksheet 12-31
Appendix 12C: Statement of Cash Flows—T-Account Approach 12-35
Data Analytics in Action 12-61
13 Financial Analysis: The Big Picture 13-1
It Pays to Be Patient: Warren Buffett 13-2
13.1 Sustainable Income and Quality of Earnings 13-3
Sustainable Income 13-3
Quality of Earnings 13-7
13.2 Horizontal Analysis and Vertical Analysis 13-9
Horizontal Analysis 13-10
Vertical Analysis 13-12
13.3 Ratio Analysis 13-15
Liquidity Ratios 13-16
Solvency Ratios 13-17
Profitability Ratios 13-17
Financial Analysis and Data Analytics 13-18
Comprehensive Example of Ratio Analysis 13-18
Appendix A Specimen Financial Statements: Apple Inc. A-1
Appendix B Specimen Financial Statements: Columbia Sportswear Company B-1
Appendix C Specimen Financial Statements: Under Armour, Inc. C-1
Appendix D Specimen Financial Statements: Amazon.com, Inc. D-1
Appendix E Specimen Financial Statements: Walmart Inc. E-1
Appendix F Time Value of Money F-1
F.1 Interest and Future Values F-2
Nature of Interest F-2
Future Value of a Single Amount F-3
Future Value of an Annuity F-5
F.2 Present Values F-8
Present Value Variables F-8
Present Value of a Single Amount F-9
Present Value of an Annuity F-11
Time Periods and Discounting F-13
Present Value of a Long-Term Note or Bond F-3
F.3 Capital Budgeting Situations F-16
F.4 Using Technological Tools F-18
Present Value of a Single Sum F-19
Present Value of an Annuity F-20
Future Value of a Single Sum F-21
Future Value of an Annuity F-22
Internal Rate of Return F-22
Useful Applications F-23
Appendix G Reporting and Analyzing Investments G-1
G.1 Accounting for Debt Investments G-2
Why Corporations Invest G-2
Accounting for Debt Investments G-2
G.2 Accounting for Stock Investments G-4
Holdings of Less Than 20% G-5
Holdings Between 20% and 50% G-6
Holdings of More Than 50% G-7
G.3 Reporting Investments in Financial Statements G-9
Debt Securities G-9
Equity Securities G-12
Balance Sheet Presentation G-13
Presentation of Realized and Unrealized Gain or Loss G-14
Company Index I-1
Subject Index I-5
Rapid Review: Chapter Content
